HP figures prompt strategic review

HP released its figures for the first quarter of this financial year, showing a slight drop in revenue, and announced a new strategic and financial value creation plan.

The Q1 figures show a slight, 0.6 percent, drop from last year’s $14.7 billion to $14.6 billion in net revenue, according to Generally Agreed Accounting Principles, or GAAP. The net earnings fell 15.6 percent from $0.8bn to $0.7bn while the GAAP diluted Earnings Per Share or EPS fell 9.8 percent from $0.51 to $0.46. However, the free cash flow rose from $0.7bn to $1.1bn. The net revenue from its Printing business was down 7 percent, including a 1 percent drop in sales of commercial hardware. 

Not surprisingly, HP’s press release referenced non-GAAP figures, which paint a rosier picture and don’t take account of things like currency fluctuations. Thus, Enrique Lores, president and CEO of HP Inc, commented: “Our Q1 results reflect a business that is strong and getting stronger. Our non-GAAP EPS growth of 25% was significantly above our guided range, driven by tremendous execution against our strategic priorities.”

He went on to say: “This is a team at the top of its game, combining the industry’s best innovation with disciplined execution and cost management to deliver for our shareholders. We have great confidence in our plans and are raising our full-year earnings outlook.”

Of course, all this is set against the backdrop of Xerox’s continuing efforts to buy HP. Consequently, HP has announced a multi-year strategic and financial value creation plan with the aim of delivering a higher Earnings Per Share figure, which of course is designed to persuade HP’s shareholders not to take the $24 per share that Xerox is offering.

This plan also aims to return $16 billion capital over three years, representing approximately 50 percent of HP’s current market capitalization. 

Last October HP announced its intention to repurchase $5bn of shares and the company has now increased this to $15bn of share with at least $8bn of these shares to be repurchased within 12 months of the annual meeting, which has yet to be scheduled. HP is planning to use its cash and available debt capacity to support its aim of a gross debt-to-EBITDA ratio of 1.5x to 2.0x.

In addition, HP has already announced a cost-cutting plan that it hopes will save around $1.2bn in structural costs and lead to productivity improvements of a further $1bn. At the same time, HP is pushing up its target operating margins, from 3.5 to 5.5 percent for its Personal Systems division, and from 16 to 18 percent for its Printing unit. For print, this means HP selling more consumables and increasing its revenue from contracts, rebalancing the value of its systems around the hardware and generally selling more graphics and 3D printing systems, which all sounds like exactly the same as everyone else is trying to do.  

This press release has lots of big numbers, mainly because HP is using the much more PR-friendly non-GAAP figures rather than the GAAP figures that we find in the legally-binding financial announcements. Thus HP is predicting non-GAAP EPS in the region of $3.25 to $3.65 and $4.7 billion to $5.1 billion of non-GAAP operating profit, all for the 2022 financial year. For reference, the earnings per share for this last quarter were $0.46 GAAP and $0.65 non-GAAP, while the net earnings were $0.7bn GAAP and $1bn non-GAAP. 

Just for good measure, HP also calls the Xerox proposal flawed, saying that it undervalues HP and “creates an irresponsible capital structure that would jeopardize the future value of the combined company and constrain its ability to invest in growth and innovation.” 

Lores added: “Our commitment to HP shareholders is unwavering and it’s abundantly clear the revised Xerox proposal meaningfully undervalues HP, creates significant risk and compromises the future of our company.” 

However, HP does say that it “is reaching out to Xerox to explore if there is a combination that creates value for HP shareholders” though this does feel as if the HP board is going through the motions, having put together a plan specifically to see off the Xerox proposal.

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